Spain scrapes out of recession but dark clouds remain

MADRID: Spain scraped out of recession in the first quarter, the central bank said Friday, becoming the last major world economy to return to growth but analysts warned any upturn could be short lived.

The Spanish economy, which is struggling to rein in a ballooning public deficit, grew by 0.1 percent during the first three months of the year after six quarters of contraction, the bank said in a preliminary estimate.

Stimulus measures enacted by the Spanish government including a cash-for-clunkers scheme "have triggered a recovery in some aspects of spending, particularly household spending," it added.

The government predicts the economy, Europe's fifth largest, will shrink by 0.3 percent overall this year, after contracting by 3.6 percent last year, before returning to growth of 1.8 percent in 2011 and 2.9 percent in 2012.

Spain entered its worst recession in decades during the second half of 2008 as the global financial meltdown compounded a crisis in the Spanish property market, which had been a major driver for growth in previous years.

There have been a few recent signs that the economy is on the mend.

Industrial production rose in March on a 12-month basis for the first time since April 2008 and the number of unemployed people in Spain fell in April for the first time in nine months, boosting the government's argument that the economy is returning to growth.

Rafael Pampillon, economics professor at IE Business School in Madrid, said that while the economy will likely post growth in the second quarter as consumers make purchases ahead of a rise of two percentage points in the value-added tax in July, it still faces a lengthy period of sluggishness.

"For the whole year growth will be negative because Spain does not have a replacement model (for its construction-based economy), it cannot create jobs. The market wants other things, it wants structural reforms," he told AFP.

"Spain does not have a model for sustainable growth. The first quarter growth data is very irrelevant," he added.

Spain, which had a public deficit of 11.2 percent of output last year, the eurozone's third largest after Ireland's and Greece's, has received a hammering on financial markets in recent days after its credit rating was downgraded by Standard & Poor's last week.

S&P cut Spain's long-term credit rating to "AA" from "AA+" on April 28 on fears the country's poor growth prospects could further weaken its public finances, fueling fears that Greek debt crisis could spread to Spain.

Ben May, an economist at Capital Economics in London, said: "Spain will need to tighten fiscal policy considerably to make large inroads into its huge budget deficit" as a "strong and sustained recovery remains a long way off.

"Events in Greece, mountains of private sector debt and troubles in the banking sector all suggest that any upturn could prove short lived," he added.